CIMB Research 2H17: Property & REITs Might Be Back In Favour

Having suffered from two consecutive years of lower earnings, there are increasingly positive signs that earnings cuts for Singapore companies are over soon. As we head into 2H17, CIMB Research foresees the possibility of the beginning of an earnings upgrade trend.

Singapore economy growing faster than expected

A contributing factor to the earnings upgrade trend is the stronger than expected GDP growth of Singapore’s economy. Economists recently surveyed by MAS reviewed and raised GDP growth forecasts for the Singapore economy.

It was an upward revision of 20 basis points from their estimates in March (2.3 percent versus 2.5 percent) after Singapore’s economy expanded by 2.7 percent in Q1. A few industries (e.g. IT, logistics) have benefited from stronger external demand.

However, CIMB Research opines that the long-term key challenge for Singapore is to achieve a more broad-based recovery. CIMB Research cited that household demand and business investments are still weak.

Moreover, private consumption expenditure contracted for the second consecutive quarter in Q1.

So, which are the sectors to overweight and underweight in your portfolio?

Looking forward, CIMB Research believes that growth and sentiment plays will be the themes to follow in 2H17. Among the sectors in Singapore, CIMB Research highlights REITs and properties as their overweight call.

Banks: Stellar Q1, but any more room to run?

Banks have managed to outperform on a year-to-date basis. That was backed by the stellar performance in 1Q17 where positive surprises took the market by surprise.

Though CIMB Research upgraded the banking sector, CIMB Research questions whether there is still room for growth for the banks given that banks are already trading on expected core earnings recovery in 2018. CIMB Research believes that any upside in prices could come from property divestment gains from their books.

Outlook: Neutral

Property: Time to add to the portfolio; sentiment play

Most property developers are now facing shrinking of their land banks. Given the low inventory levels, CIMB Research foresees 2H17 to be a time for land acquisition, either through government land tenders or merger and acquisitions (M&A).

CIMB Research predicts that land parcels with good location could draw strong interest with some forward pricing expectation. The bidding prices will underpin sentiment in the residential market in the near term.

If sale prices at new launches improve and strong land prices are tendered in upcoming government land sales, it could catalyse the share price of property developers.

The property sector is currently trading at a 31 percent discount to RNAV on average, even after a decent 1H17 performance.

Outlook: Overweight

Telcos: Avoid at all costs

If there is any sector that you want to avoid, it will be the telco sector. Telcos faced a round of de-rating and saw their share price fall. However, telcos are still priced above their fair value based on a discounted cash flow valuation.

Moreover, telcos might still face another round of negative surprises in 2H17. Given that TPG Australia is set to join in the telco space in 2018, the three telcos could be aggressively fighting for market share, which could lead to undercutting prices or heavy handset subsidies to lock customers in.

The spectrum auction in March was a guide for how aggressive the incumbents could be to protect their competitiveness. CIMB Research warns that telcos should be avoided at the moment.

Outlook: Underweight

REITs: Undeterred by the Fed rate hike

While the Fed’s latest rate hike decision to raise interest rates to 1.25 percent could have some negative impact on the share prices of REITs, CIMB Research believes that the market has already priced in three rate hikes in 2017.

That is following the guidance from the Federal Open Market Committee (FOMC) in March 2017. Borrowing costs have dipped in 1Q17 on the back of narrowing credit spreads and change in borrowing mix to cheaper overseas debt.

As such, CIMB Research sees the sound capital management and well-staggered refinancing among Singapore REITs as a good counter argument to the rising interest rate.

While Singapore REITs are not undervalued and are trading close to their fair value, CIMB Research views near-term share price weakness as decent entry points to add REITs to the portfolio.